Income Taxes

12 Months Ended

Dec. 31, 2019

Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted):



	2019		2018			2017
Current expense (benefit)
Federal	$	196,186	$	(44,462	)	$	81,101
State and other	21,252		7,202			(11,801		)
	$	217,438	$	(37,260	)	$	69,300
Deferred expense (benefit)
Federal	$	74,700	$	271,544		$	444,695
State and other	30,738		91,233			(22,388		)
	$	105,438	$	362,777		$	422,307
Income tax expense (benefit)	$	322,876	$	325,517		$	491,607

The following table reconciles the statutory federal income tax rate to the effective income tax rate:



	2019		2018		2017
Income taxes at federal statutory rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net of federal tax	3.7		4.0		3.1
Tax accounting method change	—		(2.5	)	—
Changes in tax laws, including the Tax Act	0.2		1.0		18.3
Deferred tax asset valuation allowance	(0.4	)	0.9		(1.1	)
Tax contingencies	(0.1	)	0.1		(1.0	)
Other	(0.3	)	(0.3	)	(1.9	)
Effective rate	24.1	%	24.2	%	52.4	%

In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, the following that impact us: (1) reducing the U.S. federal corporate rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; (4) repealing the domestic production activities deduction; (5) limiting the deductibility of certain executive compensation; and (6) limiting certain other deductions. As the result of the Tax Act, we recorded net tax expense of $172.1 million in 2017 related to the remeasurement of our deferred tax balances and other effects.

The 2019 and 2018 effective tax rates utilize the reduced 21% tax rate due to the Tax Act while the 2017 effective tax rate utilizes the prior 35% tax rate but reflects the revaluation of deferred taxes due to the Tax Act’s enactment.

The 2019 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings, changes in valuation allowances relating to projected utilization of certain state net operating loss carryforwards, and state tax law changes. The 2018 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings, tax benefits due to Internal Revenue Service (IRS) acceptance of a tax accounting method change applicable to the 2017 tax year, valuation allowances relating to projected utilization of certain state net operating loss carryforwards, and state tax law changes. The acceptance of the tax accounting method change provided a deferral of profit on home sales, which resulted in a favorable adjustment in 2018 due to the tax rate reduction in the Tax Act. The 2017 effective tax rate differs from the federal statutory rate primarily due to remeasurement of deferred taxes resulting from the enactment of the Tax Act, state income tax expense on current year earnings, the favorable resolution of certain state income tax matters, the domestic production activities deduction, and state tax law changes.

Deferred tax assets and liabilities reflect temporary differences arising from the different treatment of items for tax and accounting purposes. Components of our net deferred tax asset are as follows ($000’s omitted):



	At December 31,
	2019			2018
Deferred tax assets:
Accrued insurance	$	142,515		$	144,225
Inventory valuation reserves	97,585			132,495
Other	64,373			50,237
NOL carryforwards:
Federal	12,962			27,122
State	200,710			228,959
Tax credits	8,648			7,692
	526,793			590,730
Deferred tax liabilities:
Deferred income	(228,186		)	(195,596		)
Intangibles and other	(44,547		)	(26,966		)
	(272,733		)	(222,562		)
Valuation allowance	(83,953		)	(92,589		)
Net deferred tax asset	$	170,107		$	275,579

Our federal NOL carryforward deferred tax asset of $13.0 million expires, if unused, between 2031 and 2032. We also have state NOLs in various jurisdictions which may generally be carried forward up to 20 years, depending on the jurisdiction. Our state NOL carryforward deferred tax assets will expire if unused at various dates as follows: $35.9 million from 2020 to 2024 and $164.8 million from 2025 and thereafter.

We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing industry and broader economy.

The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We had $40.3 million and $30.6 million of gross unrecognized tax benefits at December 31, 2019 and 2018, respectively. If recognized, $21.6 million and $19.7 million, respectively, of these amounts would impact our effective tax rate. Additionally, we had accrued interest and penalties of $6.5 million and $5.8 million at December 31, 2019 and 2018, respectively.

It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $23.0 million, excluding interest and penalties, primarily due to potential settlements. A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):



	2019			2018			2017
Unrecognized tax benefits, beginning of period	$	30,554		$	48,604		$	21,502
Increases related to positions taken during a prior period	2,376			5,389			20,555
Decreases related to positions taken during a prior period	(7,918		)	(31,850		)	(9,665		)
Increases related to positions taken during the current period	16,332			8,411			18,895
Decreases related to settlements with taxing authorities	(1,044		)	—			—
Decreases related to lapse of the applicable statute of limitations	—			—			(2,683		)
Unrecognized tax benefits, end of period	$	40,300		$	30,554		$	48,604

We continue to participate in the Compliance Assurance Process (“CAP”) with the IRS as an alternative to the traditional IRS examination process. As a result of our participation in CAP, federal tax years 2017 and prior are closed. Tax year 2018 is expected to close by the first quarter of 2020. We are also currently under examination by various state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2015 to 2019.